Reminder: Rich People Aren't The Only Taxpayers Who Matter

I've written in the past about the media's tendency to behave as though the top tax bracket is the only one that matters when discussing tax policy. PolitiFact's new round-up of Reagan-related fact-checks links a perfect example I missed a the time: A September 20, 2010 piece about President Obama's statement that "Our tax rates are lower now than they were under Ronald Reagan," the validity of which PolitiFact assessed by looking only at top marginal rates (and getting the data wrong in the process.)

The most obvious way to make the comparison is to use income tax rates paid by people in various tax brackets. Due to the complexity of comparing a dozen or more income ranges that each need to be adjusted for inflation, economists most frequently compare just the top rate.

As PolitiFact noted, the "most obvious" way to compare tax rates now versus tax rates under Ronald Reagan "is to use income tax rates paid by people in various tax brackets." But PolitiFact didn't do that. It used income tax rates paid by people in one tax bracket: The highest. And its approach was a factual, as well as conceptual, train-wreck:

Today, the top income tax rate is 35 percent, starting at $186,825 for individuals and $373,650 for couples.

…

In 1981, Reagan's first year, the top tax rate was 70 percent, hitting individuals earning $107,100 and couples earning $215,400. The top rate dropped immediately to 50 percent in 1982 and stayed there through 1986. In 1987, the top rate fell again to 38.5 percent, and in 1988, it fell to 28 percent, kicking in at $113,300 for married individuals and $149,250 for married couples. (The 1988 incomes would be equivalent to $209,000 and $275,000 today.)

So, for one year of the Reagan presidency, the top rate was lower than it is now under Obama. For the other seven years, it was higher.

First off, let's note that PolitiFact was simply wrong about the tax rates. According to the Tax Foundation document it links, the current top rate doesn't kick in for individuals at $186,825, it kicks in at $373,650. The $186,825 threshold is for people who are married but filing separately. And in 1988, the 28 percent marginal rate applied to single people making more than $17,850 and married couples making at least $29,750 -- far lower than the threshold PolitiFact claimed. Again: I'm basing this on the same Tax Foundation document PolitiFact relied on. PolitiFact just read it wrong.

So PolitiFact's assertion that "the top rate was lower than it is now" is technically correct, but it's also a deeply absurd way to assess the overall tax picture. For single people in 1988, income above $17,850 was taxed at 28 percent. For single people in 2010, only income above $373,650 was taxed at 35 percent. Obviously, comparing a top rate that kicks in at $17,850 to a top rate that kicks in at $373,650 is pointless. But that's what PolitiFact did.

Anyway, all of that just means that PolitiFact is wrong even if you accept its approach of looking only at top brackets, because it misread the data, and because the brackets have such wildly different thresholds. The bigger problem is that it's absurd to look only at top brackets. Doing so suggests that the only people who matter are those who currently make more than $373,650 -- a tiny percentage of the country.

Here's a table, based on the Tax Foundation document PolitiFact relied upon, that demonstrates the absurdity of PolitiFact's approach. I've converted the 1988 income thresholds to 2010 dollars using CPI's inflation calculator. (And, following PolitiFact's lead, I've ignored the bubble rate in place in 1988, which had the effect of phasing out personal exemptions for high-income workers.) Finally, for the sake of simplicity, I've only included single filers.

The table clearly shows that single workers who earned less than $82,400 in 2010 face a top marginal rate that is lower than they would've faced with an equivalent income in 1988. And those making between $82,400 and $171,850 pay the same top marginal rate as they would've with an equivalent income in 1988. So, for most Americans, the top marginal rate is lower than it was in 1988, and for the vast majority, it is lower or equal to what it was in 1988. But the PolitiFact approach was to simply look at the data and announce 35 is more than 28, therefore tax rates are higher now! Nonsense. (That table, by the way, took about five minutes to make -- which, despite PolitiFact's protests that it's too complicated to look at anything other than top rates, probably isn't much more time than it took PolitiFact to get the thresholds for the top rate wrong.)

So, to recap, President Obama said "Our tax rates are lower now than they were under Ronald Reagan," which is true for most Americans. But PolitiFact decided that the only people who matter in assessing the validity of Obama's statement are the very richest Americans -- those making at least $373,650. Then it misstated the current and past thresholds for the top bracket. And based on those those errors of judgement and fact, it claimed Obama's statement wasn't true when looking at the last year of Reagan's presidency.

UPDATE: PolitiFact has issued a correction fixing its incorrect reporting of income thresholds for the top bracket. In that correction, PolitiFact stands by its claim that "1988 was the one year where Obama's comparison was inaccurate," even though his claim was accurate for 1988 if you look at the majority of taxpayers, rather than considering only the richest taxpayers.

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